When I started working on contracts, it seemed an impossible task for me to figure out how to negotiate them. Learning the law and best practices was relatively easy. The much harder bit was to translate that information into deciding what terms to ask for and explain the why behind it.
What I figured out over many years of negotiating is that contract negotiation is skill we develop by learning how to manage all the different inputs. Each negotiation is a unique set of circumstances that requires us to adjust in real-time to what is happening in that deal with those negotiators on the other side representing that counterparty.
Some of us have had negotiation training, either by a manager, mentor, or instructor. But those paths only help us understand negotiation intellectually. They are like trying to learn how to juggle by watching a clown do it. To truly develop your own negotiation skills, you have to negotiate. And that means doing it in the real world and figuring it out as you go.
I learned how to negotiate one deal at a time over many, many years. I started out treating contract negotiations more like an administrative task. I’d push our playbook approach and respond to questions with promises to investigate and respond later. Over time, I learned how to evaluate and respond during discussions. Eventually, I settled into a process that turned into a skill I could use to benefit my clients and companies.
I want to share with you what I figured out about negotiating contracts. I've boiled it down to a six-part process for evaluating and deciding what to negotiate when in discussions with the counterparty. The steps in my process combine what I learned about managing risk with how to deploy the leverage I have.
1. Learn the deal context. It all starts here. Unless we understand the product and the company, we won’t have enough information to properly identify how to negotiate an individual contract. The more we know about the context, the easier it is to figure out what terms to prioritize.
2. Use that context and the deal team to help us identify the goals for the deal. What is the company trying to achieve? When we represent a vendor, we’re usually focused on economics and quality. Vendors want to make money and prevent things that could interfere with that goal in this or future deals. When representing the customer, we’re focused on a product or service that solves a need or problem within the budget we have for that task. Customers want to ensure that paying the vendor provides that solution.
3. List what could get in the way. Once we know the context and objectives, it’s time to focus on what could interfere. For this task, we use risk management principles. The classic definition of risk is anything that could interfere with those objectives. If something interferes with a goal the company doesn't care about, it isn't a risk for this deal. For example, if we represent a startup trying to add customers at any cost, we aren’t going to prioritize minor expenses. We will want to get that deal done.
4. Assess each risk by looking at both its likelihood and impact. This step is what many negotiators miss. They focus on all risks in the same way, with a scattershot approach that treats each risk as worthy of negotiation. The problem with this approach is that we rarely get everything we want. So we need to prioritize. Looking at each risk through the lens of likelihood and impact is how we figure out our priorities.
Risk management principles explain how likelihood and impact work. Likelihood is how likely a risk is to happen during the deal. Impact is how much harm the risk would cause if it did happen. We rate them individually but then look at them together. That combination tells us how much attention a risk deserves. A risk with high impact gets priority, even when it is unlikely. A risk that is likely but has low impact gets attention after that. A risk that is both unlikely and low impact may need nothing more than the boilerplate.
Here is a simple example. A company hires a consultant to finish a project before a product launch. A missed deadline is likely and high impact. A leak of the company's confidential information is unlikely, but it could do serious damage. Both become our priorities. Small changes to the project scope are likely but low impact. A change order process handles them. We address them after the priorities. A storm that closes the consultant's office for a day is unlikely and low impact. We leave that to the force majeure clause in the boilerplate. I don't write all of this out on paper for every deal. Most of it happens in my head. But stopping to think it through helps me make better decisions.
5. Determine what bargaining power we have. Once we know the risks and their relative importance, we then determine what we’ll be able to negotiate in this context. I’ve learned over time that I have a certain amount of leverage in each deal. I’m not getting everything I want. I’ve also found that I usually get something (or else the counterparty would not have much incentive to waste their time talking to me).
I think of the amount I can realistically change in a contract for that deal as my negotiation budget. I like the money analogy because we all know how it feels when we don't have much. We spend it carefully. We plan our big purchases. We don't waste it on small extravagances. When we have very little, we make just a few asks. If we really need something big, we save up for it. I've also observed that the amount isn't fixed. We lose some when we alienate the other side and gain more when we earn their trust.
6. Spend our leverage on the biggest risks. Ultimately, we have to decide where to push and where to concede. We do that by pushing for changes that improve the risk scenario for real-world things that have a high impact. Some of those high-impact risks have a high likelihood, like nonpayment and product quality. Others have a lower likelihood but are quite dangerous, like patent infringement. We spend most of our negotiation budget trying to manage or mitigate the high impact risks. When the deal doesn’t have a lot of high impact risks, we use our budget to gain other protections and benefits in the contract.
My negotiation process helps me make sure that the asks I prioritize address real-world problems that could interfere with our objectives for the deal. I hope it helps you do the same for your companies and clients.
